“The reality is that financial markets are self-destabilizing; occasionally they tend toward disequilibrium, not equilibrium.”
Mandelbrot was a brilliant mathematicians that challenged the notion of efficient markets since its inception and spent considerable effort researching models that might capture financial markets’ volatility in a more complete way than static theories.
It would seem from the above quote that Mr. Shakespeare did not believe in leveraged markets and probably he would never have put a credit derivative in his pension account. Certainly, financial markets have changed greatly from the times of McBeth and the Merchant of Venice and in spite of recurrent crises, our capital markets are more efficient and more functional for a better society.
However, the dangers of being a borrower or a lender have not changed much and still depend on one’s ability to understand risk in order to properly manage it.
If Anais Nin is correct, investors must feel pretty good and thinking they will continue to feel this way going forward. Since our last quarterly missive, risky assets in general have increased their upward momentum and valuations have decayed within a context of historically low volatility.